Chapter 9

Understanding Emerging
Markets

International Business
Strategy, Management & the New Realities

by
Cavusgil, Knight and Riesenberger

International Business: Strategy, Management, and the New Realities 1

 Classifying Countries based on
Economic Development
Advanced economies: post-industrial countries characterized by
high per-capita income, highly competitive industries, and well-
developed commercial infrastructure. E.g., Australia, Canada,
Japan, United States, and Western European countries.

Developing economies: low-income countries characterized by

limited industrialization and stagnant economies. E.g., most low
income countries in Africa, Latin America, and Asia, such as
Bangladesh, Nicaragua and Zaire.

Emerging market economies: a subset of former developing

economies that have achieved substantial industrialization,
modernization, improved living standards, and remarkable economic
growth. They are some 27 countries in East and South Asia, Latin
America, Middle East and Eastern Europe. Examples: Brazil,
Russia, India, China.

International Business: Strategy, Management, and the New Realities 2

 Advanced Economies

• Mature state of industrial development; transitioned from

manufacturing economies into service-based economies
• Home to 14% of the world’s population, and account for
half of world GDP, over half of world trade in products,
and three-quarters of world trade in services
• Very substantial purchasing power
• Political system typically democratic and multiparty
• Economic system typically based on capitalism
• Relatively little government intervention in business
• Few restrictions on international trade and investment
• Home to the world's largest MNEs

International Business: Strategy, Management, and the New Realities 6

 Developing Economies

• Low discretionary incomes; limited proportion of

personal income spent on purchases other than
food, clothing, and housing.
• As a proportion of world population, 17% live on less
than $1 per day; 40% live on less than $2 per day
• Combination of low income and high birth rates
tends to perpetuate poverty.
• Sometimes called underdeveloped countries or
third-world countries, but these terms are imprecise

International Business: Strategy, Management, and the New Realities 7

 Developing Economies (cont’d)

• Hindered by high infant mortality, malnutrition, short life

expectancy, illiteracy, and poor education systems; correlates
with vicious cycle of poverty.
• Productivity. Stagnant; living standards deteriorate, particular
in countries with high population growth rates
• Debt. Governments are often severely indebted. Countries in
Africa, Latin America, and South Asia have debt levels close to
their annual GDP.
• Bureaucracy. Much of Africa’s poverty is the result of
government policies that discourage entrepreneurship, trade,
and investment.
 Example – starting a new business: In sub-Saharan countries in Africa, involves
an average of 11 different approvals, and takes 62 days to complete. In advanced
economies, takes an average of 6 approvals, and 17 days to complete.

International Business: Strategy, Management, and the New Realities 8

 Emerging Market Economies (‘Emerging Markets’)

• Most distinguishing characteristic: countries are enjoying

rapidly improving living standards and a growing middle
class with rising economic aspirations. Evolving towards
wealthy nation status.
• Importance in the world economy is increasing as attractive
destinations for exports, FDI, and sourcing.
• Account for over 40% of world GDP, over 30% of exports,
and receive over 20% of FDI.
• In mid-2000s, collectively had average annual GDP growth
rate of nearly 7%, much faster than advanced economies
• Benefit from low-cost labor, knowledge workers, low-cost
capital, government support, and powerful conglomerates

International Business: Strategy, Management, and the New Realities 10

 The New Global Challengers

Some 100 companies from Emerging Markets

poised to become important 21st-century MNEs.
Examples:
• Brazil: Embraer, Sadia & Perdiago, Natura
Mexico: America Movil, Groupo Modelo
India: Ranbaxy, Infosys, Tata Tea, WIPRO
China: Galanz, Haier, Chunlan Group Corp.,
Lenovo, Pearl River Piano
Turkey: Koc Holding, Vestel & Sisecam

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 Transition Economies

• Special category of Emerging Market Economies

• Mainly former Soviet Union countries. E.g., Czech Republic,
Hungary, Poland, Romania, Russia
• Long characterized by excessive regulation and entrenched
government bureaucracy
• Undertook large-scale privatization of state-owned enterprises
• Have made great strides in political and economic restructuring
• Introducing legal frameworks to protect business and consumer
interests and ensure intellectual property rights
• Initially, western companies had a hard time recruiting
managers who understand modern management practices

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 Opportunities for Foreign Firms in China

• Foreign firms can profit from China’s (i) low-cost labor and (ii)
growing affluence
• Many foreign companies set up manufacturing facilities and
marketing subsidiaries, but success is slow.
• Wal-Mart sourced over $30 billion of merchandise from China
in 2007, providing huge cost savings
• Large consumer segment: 250 million ‘middle-class’ residents
• Success requires deep understanding of the market and long-
term commitment: Coca-Cola, General Motors, McDonald's,
Motorola, Airbus, and Volkswagen are leading examples.
• Challenges: Disparate rates of development between coastal
areas vs. west China; poverty; environmental degradation

International Business: Strategy, Management, and the New Realities 15

 What Makes Emerging Markets Attractive?

1. Emerging markets as target markets

• Growing middle class
• The largest emerging markets have doubled their
share of world imports in the last few years.
• Emerging markets are excellent targets for
manufactured products, technology, and
sophisticated technology
• Textile machinery industry in India is huge
• Oil and gas exploration are big in Russia
• Agriculture is a major sector in China.
International Business: Strategy, Management, and the New Realities 16
What Makes Emerging Markets Attractive? (cont’d)

2. Emerging markets as manufacturing bases

• Home to low-wage, high-quality labor for manufacturing
and assembly operations.
• Large reserves of raw materials and natural resources.
• E.g., South Africa and diamonds; Brazil and bauxite
• Thailand is an important manufacturing location for
Japanese MNEs such as Sony, Sharp, and Mitsubishi.
• Malaysia and Taiwan are semiconductor manufacturing
sites for Motorola, Intel, and Philips
• Mexico and China are critical in consumer electronics
and auto assembly

International Business: Strategy, Management, and the New Realities 17

What Makes Emerging Markets Attractive? (cont’d)

3. Emerging markets as sourcing destinations

• MNEs have established call centers in Eastern
Europe, India, and the Philippines.
• Dell and IBM outsource certain technological
functions to knowledge workers in India.
• Intel and Microsoft have much of their
programming done in Bangalore, India.

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 Market Potential Indicators

Three practical approaches firms employ in

assessing market potential of individual
countries are:
 per-capita income
 growth rate of per-capita income
 size of middle-class, and
 a mix of market potential indicators

International Business: Strategy, Management, and the New Realities 19

 Purchasing Power Parity
Adjustment to per capita GDP

• Compared to per-capita GDP adjusted for

current exchange rates, purchasing power
parity adjustment provide a more realistic
indicator of purchasing power of consumers in
emerging and developing economies.
• PPP adjusted per-capita GDP more
accurately represents the amount of products
that consumers can buy in a given country,
using their own currency and consistent with
their own standard of living.
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 Emerging Market Potential Index (EMPI)

The EMPI combines factors that provide firms with a realistic

measure of export market potential:
• Market Size: the country’s population, especially urban population
• Market Growth Rate: the country’s real GDP growth rate
• Market Intensity: private consumption and GNI represent
discretionary expenditures of citizens
• Market Consumption Capacity: The percentage share of income
held by the country’s middle class
• Commercial Infrastructure: characteristics such as number of
mobile phone subscribers, density of telephone lines, number of
PCs, density of paved roads, and population per retail outlet
• Economic Freedom: the degree of government intervention
• Market Receptivity: the particular country’s inclination to trade
with the exporter’s country as estimated by the volume of imports
• Country Risk: the degree of political risk

International Business: Strategy, Management, and the New Realities 23

Challenges of Doing Business in Emerging Markets

Political stability
• Absence of reliable government authorities
increases business costs and risks, and
reduces ability to forecast business
conditions.
• Corruption and weak legal frameworks
• E.g., Argentina, Indonesia, Russia, and
Venezuela experience substantial corruption.

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 Challenges of Emerging Markets (cont’d)

Weak intellectual property protection

• Even if they exist, laws that safeguard
intellectual property rights may not be
enforced, or the judicial process may be
painfully slow.
• E.g., in China, Indonesia and Russia,
counterfeiting is common, especially of
software, DVDs, CDs. In India, weak patent
laws discourage investment by foreign firms.

International Business: Strategy, Management, and the New Realities 26

 Challenges of Emerging Markets (cont’d)

Bureaucracy and lack of transparency

• Burdensome administrative rules, as well as
excessive requirements for licenses,
approvals, and paperwork, delay business
activities.
• Lack of transparency implies that legal and
political systems are not open and
accountable. Lack of transparency is
associated with corruption.

International Business: Strategy, Management, and the New Realities 27

 Challenges of Emerging Markets (cont’d)

Partner availability and qualifications

• Alliances with local partners helps gain
access to local markets, supplier and
distributor networks, and key government
contacts. May be critical in complex markets.
• But qualified business partners are not
readily available.

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 Challenges of Emerging Markets (cont’d)

Dominance of family conglomerates

• Large, highly diversified, privately-owned firms that
control much economic activity and jobs in emerging
markets. Enjoy government support, extensive
networks, access to capital, market knowledge.
• South Korea – chaebols; the top 30 FCs account for
nearly half the assets and industry revenues in the
Korean economy. Samsung, the most famous
Korean FC, has annual revenues of $140 billion.
• India – business houses
• Latin America – grupos
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International Business: Strategy, Management, and the New Realities 30
 Examples of Partnering with Family Conglomerates

• Ford partnered with Kia to introduce the Sable line

of cars in South Korea, leveraging Kia's strong
distribution and after-service network.
• Digital Equipment Corporation (DEC) designated
Tatung the main distributor of its workstations and
client-server products in Taiwan, leveraging
Tatung's local experience and distribution network.
• Danone (French producer of Dannon yogurt and
Evian bottled water) entered a joint venture with
Sabanci in Turkey, leveraging Sabanci’s distributors,
retailers and knowledge of the market.

International Business: Strategy, Management, and the New Realities 31

 Managerial Strategies: Marketing to Governments

• In Emerging Markets, government agencies and state-

owned enterprises are important, well-financed
customers
• Governments buy enormous quantities of products (such
as computers, furniture, office supplies, and motor
vehicles) and services (such as architectural, legal, and
consulting services).
• State enterprises operate in areas such as railways,
airlines, banking, oil, chemicals and steel, and buy from
foreign suppliers.
• E.g., the Three Gorges Dam in China was built by firms
such as ABB, Hitachi, Kvaerner, Siemens, and GE.
International Business: Strategy, Management, and the New Realities 32
Major International Contractors Target
Major Government Projects
 Innovative Solutions to
Local Economic Development
• MNEs are involved in fostering economic development,
via profitable microfinance, modernization projects,
development of distribution channels and other
infrastructure projects, targeting the Bottom of the
Pyramid.
• Unilever and P&G sell Sunsilk and Pantene shampoo in
India for $0.02 per mini-sachet.
• Narayana Hrudayalaya sells health insurance for less
than $0.20 per person per month in India.
• Amul, one of India’s largest processed food companies,
sells various food products to millions of poor people.

International Business: Strategy, Management, and the New Realities 34